The Impact of CFPB Bulletin 2012-03 on Title (Closing) Agents

CFPB Bulletin 2012-03 addressing Service Provider Relationships sets forth the Bureau’s expectation that supervised banks and nonbanks [including mortgage lenders] will oversee their business relationships with service providers [including title (closing) agents] in a manner that ensures compliance with Federal consumer financial law in order to protect consumers’ interests and avoid consumer harm.

In the Bulletin, the CFPB warns that service providers [title (closing) agents] who are unfamiliar with applicable federal laws, who do not implement compliance measures carefully and effectively, or who exhibit weak internal controls can harm consumers and create potential liabilities for themselves as well as the entities [mortgage lenders] with whom they have business relationships.

To that end, the CFPB expects [mortgage lenders] to have an effective process for managing the risks of [title (closing) agent] relationships. To limit the potential for statutory or regulatory violations and related consumer harm [mortgage lenders] should take steps to ensure that their business arrangements with [title (closing) agents] do not present unwarranted risks to consumers. These steps should include, but are not limited to:

Conducting thorough due diligence to verify that [title (closing) agents working for title agencies or law firms] understand and are capable of complying with Federal consumer financial law;

Requesting and reviewing the [title agency’s or law firm’s] [written] policies, procedures, internal controls, and training materials to ensure that the [title agency or law firm] conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities;

Including in the contract [e.g., written loan closing instructions or other written “services” contract] with the [title agency or law firm as settlement service provider] clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities, including engaging in unfair, deceptive, or abusive acts or practices;

Establishing internal controls and on-going monitoring to determine whether the [title agency or law firm] is complying with Federal consumer financial law; and

Taking prompt action to address fully any problems identified through the monitoring process, including terminating the relationship [with the title agency or law firm] where appropriate.

As noted above, the Federal Compliance Risk Management Manual and the Multi-State Study Manual for Closing Agents were designed to assist title agencies, law firms, and settlement/escrow companies meet or exceed current Federal laws, rules, and regulations. The Federal Compliance Risk Management Manual provides 550 pages of CFPB examination checklists, sample risk management policies and procedures, sample disaster recovery [business interruption] plan, and sample employee handbook giving small to midsize companies the assistance they need in drafting risk management policies, procedures, and internal controls. The Multi-State Study Manual for Closing Agents provides 600+ pages of employee training materials in a self-study format as well as a single-load Interactive Test CD which employers can use to test employee comprehension of the training materials.

The Impact of the Integrative TILA-RESPA Final Rule on Title Insurance and Title (Closing) Agents

The title insurance industry as a whole—and title (closing) agents in particular—have not been treated well under the Final Rule. Owner’s title insurance coverage is required to be shown as “Optional” on the new federally-mandated disclosures, while the title insurance premium on the new Loan Estimate is required to be calculated and disclosed other than the actual rates are insurer-filed or state-promulgated. Both of these moves, by the CFPB, create myriad unintended consequences that have the potential to financially harm consumers [borrowers]. The Integrative TILA-RESPA Final Rule Implementation Study Manual contains an entire chapter [Impact of the Final Rule on Title Insurance] examining this issue.

At the same time, the one-two punch of CFPB Bulletin 2012-03 and the treatment of title (closing) agents under the new Final Rule has equal potential for harming consumers by effectively placing title (closing) agents under the thumb of mortgage lenders; rather than continuing to support them as the only independent party to stand in the middle of a purchase/sale/finance transaction owing co-equal duty to all parties by closing in compliance with three main transaction-governing documents – the real estate contract (sellers/buyers); loan closing instructions (lenders/borrowers); and the title commitment (insurer/insureds).

In the Final Rule, the integration of the Final TIL with the HUD-1 settlement statement to create the new Closing Disclosure is expected to result in many, if not most, lenders opting to prepare and deliver the Closing Disclosure directly to consumers, rather than permit title (closing) agents to do so. The Final Rule leaves it up to the discretion of the creditor [lender] to choose who will deliver the Closing Disclosure to the consumer [borrower] three business days in advance of consummation. Since the Closing Disclosure contains TIL information – TILA being a “stronger” federal regulation than RESPA—it should not come as a surprise when many, if not most, lenders opt to prepare and deliver it themselves.

There are two major ripple effects—both potentially harmful to consumers while also detrimental to title (closing) agents—that should be on title (closing) agents’ radar screens:

First, where lenders choose the “DIY” route by preparing and delivering the Closing Disclosure to consumers [borrowers]—on refinance transactions they may also choose to outsource document signing to independent notaries rather than outsourcing the closing to title (closing) agents, closing attorneys, or settlement/escrow companies. Some major lenders have reportedly discussed this option with title insurers who maintain independent notaries on their vendor management services [VMS] lists. The CFPB, itself, during workshops leading up to proposed rulemaking, stated that some lenders may choose to take the settlement process inhouse, via lender-owned, lender-affiliated, or lender-preferred-partner providers. This effectively results in consumers [borrowers] being denied the benefit of a closing conducted by a knowledgeable settlement professional while increasing the likelihood of “bad actor” lenders running amok with consumer-harmful loan costs and terms. Without independent oversight of the settlement process—that provided by title (closing) agents, closing attorneys, and settlement/escrow professionals—future refinance transactions will be akin to putting the fox in charge of the henhouse.

Second, on purchase/sale finance transactions, since lenders also prepare and deliver the Loan Estimate—which, as noted above, includes disclosing both loan title premium and owner’s title premium other than actual insurer-filed or state-promulgated rates—it is likely that many, if not most, lenders will follow the path-of-least-resistance and carry over the erroneous charges shown on the Loan Estimate to the Closing Disclosure, resulting in consumers [borrowers] paying more for title insurance premiums than they otherwise should under insurer-filed or state-promulgated rates. This would not occur if title (closing) agents prepared the Closing Disclosure, as they would recognize the importance of complying with state law governing insurer-filed or state-promulgated title insurance premium.

Order the Federal Compliance Trilogy Today!

Moving forward, to ensure full compliance with ever-changing federal laws, rules, and regulations, title agencies, law firms, and settlement/escrow companies—as third party service providers—must have written documented risk management policies and procedures as well as documented training materials on federal compliance issues. This includes being able to document that all applicable personnel have received applicable federal compliance training, understand it, and have implemented same. As noted above, the Multi-State Study Manual for Closing Agents provides full self-study materials included a single-load Interactive Test CD that employers can use to test employees’ understanding of the training material.

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